Opinion: Maverick ‘impact-first’ investing sits between philanthropy and market returns

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The investment theme for the next decade may turn out to be setting aside financial rates of return and increasing returns to society.

The ranks of “impact first” maverick investors who are willing to forgo certain financial performance as they put their capital to work for social impact are growing. As it becomes easier and easier to invest with your values, going against the ingrained norms of the investing community becomes more and more popular.

No group is better placed to give priority impact businesses the capital they need than private wealth owners. Campden Research estimates that some 7,300 family investment firms around the world, each with typically more than $ 100 million in assets, manage $ 5.9 trillion. It is these wealthy individuals and families who have the most leeway to declare social or environmental impact as a priority for part of their private investment portfolios.

In fact, wealthy individuals and families are already investing with social good as their goal. Campden Research reports that private wealth holders will increase their average portfolio allocation for impact investing from 20% in 2019 to 35% by 2025.

The need has never been greater. The social and economic toll of COVID-19, along with increased concerns about climate change, racial injustice, income inequality and gender discrimination, have injected new urgency into the quest to direct capital to some of the biggest problems in society.

While most impact investors seek market rate returns as well as social good, impact investors are “willing to give up some financial return if they have to,” says a report. of the Monitor Institute. For example, impact-focused investors helped launch d.light’s solar home business in developing countries and AeroFarms’ vertical indoor farming operations in the United States. Both companies needed patient, risk-taking capital early on, when traditional investors saw more risk than reward. Both have now moved to more traditional forms of investment.

To date, only a tiny amount of private wealth is directed to impact-driven investments. The Global Impact Investing Network rates the priority investment at just 7.5% of the $ 47 billion in new impact investments made in 2019.

While high net worth individuals are used to making large donations to nonprofit institutions, their investment mindset is based on traditional practices focused on the primacy of wealth growth. The fund managers and investment advisers they hire are even more committed to financial performance as a measure of success. Leaving financial returns on the table in the name of impact has not been a widely accepted strategy.

Breaking this psychological barrier begins by recognizing impact investing first as one more option on a continuum of returns, where it sits between impact investing for market returns and philanthropy. Unlike philanthropy, impact investors expect a return, but accept less than the market rate. Social and environmental impact supplants financial gain as the currency of success. It’s a different way of thinking about “total return”.

With that mental hurdle passed, embarking on impact investing has never been easier. High net worth individuals and family offices can outsource to a growing number of funds, advisers and intermediaries who have priority impact options. Jordan Park, Tiedemann Advisers, Align Impact and Avivar Capital, to name a few, offer families and institutions a range of wealth management and impact investing services, including access to priority impact opportunities.

Family offices can also build a lean team by adding a few specialists to their staff and growing their portfolios with impact-driven investments. This is a practical first step for investors who want to make room for impact investing, but don’t want to go all out yet.

Other family offices, such as Omidyar Network, Ceniarth, Blue Haven Initiative and Spring Point Partners, have formed their own internal teams. Internal decision making closely links investor values ​​and goals with investment decisions. It also makes impact investing a central commitment, not a side bet.

Certainly, as impact investing grows, there is a gap between aspiration and execution. Campden’s family office research found that 65% of family offices believe they have a role to play in reducing economic inequality, but only a tiny fraction of their collective wealth is currently spent on priority impact investments designed to alleviate poverty, disease and inequality. , social injustice, environmental degradation, etc.

There has never been a better or more urgent time to close this gap.

Michael Etzel is a partner in the Boston office of the Bridgespan Group, where Mariah Collins is responsible. The Bridgespan Group is a social impact consultant and advisor to nonprofits and NGOs, philanthropists and investors. Matt Bannick is the former Managing Partner of the Omidyar Network and a Bridgespan Fellow. They are co-authors of “Back to the Frontier: Investing that Puts Impact First”.


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